• Why is this so hard to understand? (Part 4)

    I get that many of you hate government. You hate it so much that you want to blame everything on government.

    There are plenty of things that government does poorly. Or, at least you can make that argument, and find some support for it out there. For instance, many people believe that government does a terrible job at sparking innovation. I could imagine a debate there. Some think that government does a bad job at providing choice. That’s entirely defensible. Government run systems also allow less room for profit, which can drive out entrepreneurs. Also arguable.

    But what government systems do well is hold down costs. They use central planning. They use their large market power to negotiate for reduced reimbursement (see Part 2). They buy drugs cheaper. They eliminate profit and overhead.

    This is what government does well. It’s why every other country that has more government involvement than ours spends less than we do.

    So fee free to argue that government is stifling innovation, restricting freedom, or limiting choice. But if your goal is to reduce spending, then allow government to do what it does well, and do that – even at the cost of the other things. But don’t argue that reducing government involvement is the way to reduce spending.

    Part 1 is here. (When Medicare spending goes up, seniors’ premium costs go up.)

    Part 2 is here. (You can be for reducing Medicare spending, or you can be for increasing Medicare spending, but you can’t be for both.)

    Part 3 is here. (If you spend more on Medicare, someone has to pay for it.)


    Comments closed
    • Central planning does not hold down costs. Central planning creates inefficiencies. We know this from, among other things, experiments with communism.

      The USA has less government involvement in health care than any other country. The USA spends more money on health care than any other country. Therefore, more government involvement in health care will drive down costs. See a problem with that argument? It’s a massive post hoc, and one that a real economist would realize is ridiculous.

      The USA spends more money on health care because the system is poorly designed, because Americans feel entitled to treatment for self-inflicted chronic illness, because the system uses the latest and most expensive technology to treat that chronic illness, and because health care professionals are paid more than in other countries. Yes government intervention could mitigate some of these issues, but there is no evidence getting more involved would result in a net decline in spending.

      • Ignoring your veiled insults, there are many, many, many examples of studies on this blog that show that government health care systems in this country hold down costs more than private insurance. Few dispute this. It’s the reason that Medicare and Medicaid reimburse less.

        Also, while it’s flippant (and perhaps fun for you) to insult me with your over-simplified massive post hoc line, it ignores the fact that it’s much more complicated than that. Systems with the most government (UK) are often the cheapest. Systems with the least government (US, Switzerland) are often the most expensive. Systems with intermediate government involvement are intermediate in terms of cost. What do you call someone who ignores that?

    • I figured a few veiled insults were appropriate given the condescending title of your post (I’m brand new to your blog, but such a title suggests that type of thing is business as usual around here). Perhaps I was mistaken, and I promise this response will be without any sort of ad hominem.

      It is meaningless to compared costs of systems without also including a measure of quality. Indeed, the cheapest systems in the world are the ones with no government involvement at all; systems in very poor countries where, as I am sure you know, children still die from illnesses that barely keep westerners home for a sick day.

      So in order to discuss costs and levels of involvement, it is important to include quality as a measure. I will give you an example:

      The best health care system in the world for the past 5 or so years, by most measures, has been the Dutch system (I can provide sources if needed, but a quick look at various ratings reports makes this evident). They spend slightly more than Canada does per capita, but have far less government involvement. They also have a much better system.

      When you look at Canadian vs US numbers, you are also ignoring the fact that most sick wealthy Canadians travel to the US for treatment. I don’t know how it’s calculated, but I wouldn’t be surprised if those costs counted as private costs to the American system (they certainly aren’t counted as private costs in the Canadian one).

      • Since you’re new, here’s how I sometimes work. When addressing the system, or the world in general, I will sometimes be snarky. That’s my right. There’s no reason to take it personally. I can assure you I’m not addressing you personally, so there’s no reason to take anything I say as such.

        As for your comments about quality, I suggest you start with my 10-part series on the topic before assuming I haven’t addressed that. Here: http://theincidentaleconomist.com/wordpress/how-do-we-rate-the-quality-of-the-us-health-care-system-introduction/ Then feel free to read the FAQ we wrote on quality: http://theincidentaleconomist.com/wordpress/how-do-we-rate-the-quality-of-the-us-health-care-system-faq/

        Then, you might want to read the ten-part series I wrote on costs in the health care system. Here: http://theincidentaleconomist.com/wordpress/what-makes-the-us-health-care-system-so-expensive-introduction/ Then you can go through the FAQ we have on the subject. Here: http://theincidentaleconomist.com/wordpress/what-makes-the-us-health-care-system-so-expensive-faq/

        In general, though, it’s valuable to compare ourselves to countries we’d care to be compared to. Of course we could have the cheapest health care system if we had no system. The question we care about is how do we achieve a sytstem as close to universal as possible in the most cost-effective manner.

        As to your assertion that I have ignored your groundless claim that Canadians come here for care, well, read this: http://theincidentaleconomist.com/wordpress/meme-busting-canadians-regularly-come-to-the-us-for-care/

      • I think you underestimate the level of government involvement in health care in the Netherlands. I will grant that it — and the Swiss, German, French, and Japanese systems, among other “social insurance” systems — nominally involves less government input than Canada, where the basic health care insurance is provided in separate systems by each province, with supplemental private insurance covering health services and premiums and co-pays not provided by the provincial systems, and low income people receiving some coverage for this from the respective provinces.

        In the Netherlands over 90% of insurance is provided by four insurance companies. These companies are required by law to be non-profits, and the way they operate is tightly controlled in other ways by the laws that created the new system early in the last decade. The insurance companies meet with representatives of providers and hospitals to create the payment system in force each year, but the government reserves the right to enter these negotiations and force various accommodations. Most recently, that has involved several instances of the government demanding that providers and hospitals refund payments that the government deemed excessive, as well as working with insurers and providers to create a DRG-like system that is currently a work in progress.

        The system is very successful in terms of both acceptance and outcomes (where it attains the same sort of superior results compared to the US that is typical of most advanced countries.) Some of its popularity is undoubtedly due to its newness, since the system has existed for less than ten years following a complete revision of the old Dutch system (a dual track system with a fully socialized system for the lowest 60% or so of the income distribution and a true private system for the more well to do.) In health care, new often tends to be seen as better , but there is every indication that the system is a very fine one.

        The major drawback of the Netherlands system is that it is the second most expensive — a distant second to us — in the world, about 65% as costly as ours. The Dutch are launching a plan involving government, insurers, and hospitals and providers to try to achieve better cost controls.

        All that said, I am certain that if Romney, Ryan, Boehner, and the other GOP leaders were to offer to adopt the Dutch system whole, we could have a new health care system replacing the ACA, Medicare, and Medicaid by no later than Columbus Day, since progressives would trample any recalcitrant Blue Dog Democrats in their eagerness to join Republicans to vote in the program. That is highly unlikely, though, since the Netherlands system is considerably more strict in terms of government control of both insurance and medical care than the ACA, and as such would likely be completely unacceptable to people who feel increased government involvement to be anathema.

      • You are obviously ignorant of the Dutch system, and the government’s involvement in regulating and funding it.

        The private insurance component exists in a tightly-regulated sandbox, with community rating, guaranteed issue, and heavily defined coverage; half of the cost is covered by a payroll tax. Premiums are fixed — by the government. Special conditions are forbidden — by the government. The government regulator balances out payments and claims between the different private insurers. Insurers compete at the margins (in areas like dental and vision coverage) and not the universal package of medical coverage.

        Beyond that, there’s an explicitly public component funded from general taxation that covers long-term medical care, disability, treatment for the severely mentally ill — oh, and abortions.

        It may be less encompassing than the Canadian provincial system, but only marginally, and it refutes your swathing claims about the inefficiency of central planning in healthcare provision.

    • I will read through your posts. However, you didn’t address the Netherlands v Canada issue that causes some problems for your argument.

      In terms of your post related to Canadians travelling to the USA for care, I will admit I would have guessed the numbers were higher. However, even if only a small percentage of Canadians avail themselves of the American system, it doesn’t mean a significant percentage of rich Canucks don’t use the American system for a set of procedures. Extrapolating on your own numbers we are still talking about tens of thousands of Canadians seeking elective care in the USA. I think it’s safe to assume most people wouldn’t bother with the trip unless it was for a serious (probably expensive) procedure. That doesn’t represent an insignificant expenditure of Canadians in the US system (albeit more significant in terms of % it takes out of Canadian spending vs % it puts into American spending due to the size different in the two systems).

      • Netherlands?!?!

        Man, I love a good slap-down.

      • It has been a whole week and we are still waiting for your response to pieces of evidence that have been posted in this blog. Just wondering if you plan to provide any answers.

    • Aaron,

      The rates of growth between the USA and other countries were very similar in the 60s, 70s, 90s, and 2000s. The huge gap between the USA and other countries can be virtually entirely attributed to the 1980s, when something mysterious happened. But other than that, the USA has followed the same rates of growth since the 1960s. It is true that in 1960 the level in the USA was a little bit higher and would be even now had the USA followed the same trend in the 1980s as others, but it would be minor, like that of 1960.

      I don’t see how you can say that source of the huge gap is government intervention by other countries, instead of something exclusively happening in the 80s.

      Best regards

    • I would like to point out two things. Though, I think I might be late to the debate.

      First of all, you’re arguing that government holds down costs. But I think you mean government holds down health costs. As far as I know all of your evidence talks only about this one sector. Do you really think that costs would be lower in any sector that government enters? I have serious doubts.

      Secondly, you’ve also ignored the ways that government makes health care more expensive (mandating particular types of coverage, for example). I’m a graduate student, and my health insurance premiums have increased in both of the last two years, where in the previous three years they had been constant. The insurance company has cited the ACA for the increases.

      • Although it is to be expected that health care insurance costs will continue to rise, in the period since the ACA was passed the rate of health care cost growth has actually declined. As usual, Medicare growth has led the way, falling from 6% to 4% in 2010 and then to about 3.5% in 2011. At that rate the rate of cost growth was BELOW the planned targets of GDP growth plus 1% incorporated in both the ACA and in the Romney-Ryan plan. Private insurance cost growth continued to be about 7% in 2010 but fell to about 4% in 2011.

        Some of the change in private insurance may be due to the recession, but the change in Medicare, a program that almost exclusively insures people who are retired or disabled, should not and would not be effected by the recession. It appears, both from surveys and anecdote, that the main driver has been implementation of changes by hospitals and providers to prepare for the full implementation of the ACA, since they cannot wait till the last minute to plan and initiate changes. I happen to personally know the CEO of one of the larger health care systems in the country, and he reports that his group has been aggressively implementing plans to conform to the ACA, including creation of an ACO for his system.

        So while some of your increases in costs may be due to the ACA coming, most are probably due to normal growth — the ACA just offers an easy thing for your company to point to.

        Meanwhile, you probably realize that it is true that over the history of the program Medicare has been much more effective at holding down cost than private insurance, for a variety of reasons. The only exception to that rule was a short period in the 90′s when managed care made private insurance briefly more efficient than Medicare.

        As to the mandates included in many government insurance regulations, those exist to make sure that the insurance covers the needs of insured people, and to especially make sure that important preventative measure are covered. This is really for the good of everyone, since failure by patients to get this care often leads to greater costs later, and some of the care — like vaccinations — has important public health implications for the whole population. In the end, you may never use or need pre-natal care, but providing pre-natal care is one of the best investments available for you, since the costs involved in neonatal ICU care and the long term care of children handicapped by premature birth can easily wipe out any small savings from not covering pre-natal care, and those costs would eventually reach you as an insured person and taxpayer. National health care systems like Britain’s National Health, which have a very good accounting grasp of what increases and what decreases their costs, are very aggressive in promoting those types of care because they save so much money.

    • It’s very easy to understand. As Chris Mooney and others have pointed out recently, when it comes to political beliefs and conservative beliefs in particular, they are based strongly on ideology and personality types. Conservatives believe government is bad at everything, and that is that, and no arguments will ever change their minds. Appeals to reason and evidence will get you nowhere because their beliefs are not based on reason and evidence but rather the type of brain they have (really).

    • Jon S. said

      Central planning does not hold down costs. Central planning creates inefficiencies.

      So what’s up with Walmart? Wasn’t central planning a key to their success? How about McDonald’s franchises, where the centrally planned menu is practically identical everywhere?

      How about central planning when it comes to emergency response? Fighting wars? Gathering intellegence?

      Central planning is good for somethings, not others.

    • Surely, it is not hard to understand the following:

      a) The demand for healthcare services would be lower in the absence of medicare…. A lot of old people might just choose to take pain meds and pass on instead of getting expensive end-of-life care that extends their life for a few more days/months.

      b) The supply of healthcare services would be higher if Government stopped doing the bidding of the the AMA (by restricting foreign doctors from practising in the US, ever-stricter licensing requirements etc)

      On the other hand, I can’t think of any Government intervention that actually either increases the supply of medical services or decreases the demand for them. Can you ?

      So, in practise, the Government does not hold down costs…. On the contrary, it increases them.

      Now, let us go to the economic theory:

      Who are the primary beneficiaries of a bloated healthcare sector …. Doctors (AMA) and drug companies ….. i.e organized groups of people who can throw their weight around during elections…

      The costs of bloated healthcare, meanwhile, are spread out over the entire population….

      Public choice theory would predict that Government would intervene …… to cause higher not lower prices for healthcare services.

      So, if you assert that Government will bring down costs… I have two simple questions for you ….

      a) Why ? What’s in it for them ?
      b) Do you know any examples where it has done this ?

      • Some good points. But let’s rethink this separating out costs vs. prices and unit costs (or prices) vs total cost (or spending). Factor in supply sensitivity of care and supplier induced demand and it starts to become something like complete.

        Also relevant is the nature of the goal. We could have zero government and far lower total health spending by outlawing all insurance. It is not evident to me people would be better off. Some have a goal of universal coverage (or, at least, universal access to affordable coverage). If that is taken to be the goal, what’s the least costly way to achieve it? What does the evidence suggest?

        I’ll leave all this for discussion in the comments. If you want our contribution, you can search this blog.

        • What makes an individual better off is entirely subjective.

          An old person, having to choose between using his own assets for his expensive end-of-life healthcare and passing it on to his children while embracing a slightly early death might well choose the letter …… and who’s to say that it is the wrong choice ?

          I am forced to pay into medicare throughout my life and then obliged to accept whatever treatment the Government is willing to pay for once I turn 65.

          I forfeit all of the money I paid in if I do not accept the care. I do not get to pass it on to my children.

          I do not even get to choose not to be a part of medicare and take my chances after 65 (I might have a high time preference and might be planning to party a lot and smoke and eat burgers and drink soda and drop dead by 65 !…. Who are the bureaucrats to stop me ??)

          Where is the evidence that this arrangement makes me better off (let alone the rest of society) ? …

          And that is just one part of it ……

          Even if accept that universal healthcare is infact a good idea, where is the evidence that Government has an incentive to control costs ?

          Sure, it can bargain for lower drug prices, but why would they want to ? What’s in it for them ? …. and who is to say that lower drug prices are better in the long run ? Lower drug prices imply lower profits for drug companies and therefore, lower capital investment in drug research ! That may or may not be a good tradeoff but hardly one that politicians can be trusted to make !

          It is the same with doctors…. Government could make doctors work more for less money, but that will surely mean that fewer people will want to be doctors in the long run… Again, a tradeoff that politicians can hardly be trusted to understand.

    • I love it! You’d think that the “private insurance market” wasn’t oppressively regulated and provided by employers. You might get the impression from reading this blog that it was, you k now, an actual market. I know I get my personal computers from an employer-provided plan, don’t you?

    • “This is what government does well. It’s why every other country that has more government involvement than ours spends less than we do.”

      That’s not why. Adverse selection is why.

    • “They buy drugs cheaper.”

      I might challenge this statement. Medicare pays for Part D drugs but the prices are negotiated by private plans. Part B drugs are set through a formula (ASP+6%, AMP+6%) that has questionable methodology. Medicaid can be private plans or public plan that can set pricing. 304B drug pricing benefits from lowest pricing but this would be difficult to expand to a larger population. Finally the Veteran’s Health Administration negotiates lower pricing but also has the abliity to exclude popular drugs from its formulary because well it’s only veterans and what are they going to do if Liipitor is excluded. This wouldn’t fly for Medicare writ large as CBO has scored (iirc ~$10B a year in savings).